The following is a guest post from Dr Tim Rideout, who many will know for his work on Scottish currency issues:
There is a Fact Check article in The National newspaper in Scotland today about some silly statements from the Lib Dems who are claiming that Scottish independence would have been a disaster by now because the currency would have collapsed and we would now be finished off by the pandemic and our inability to cope with its economic impact. It is a good rebuttal effort, but could be improved a little in some areas. I offer this in addition:
First, any country — big or small — that has its own currency can always do exactly what the UK (and almost everywhere else) has done. That is, to create whatever money is needed to deal with the Covid 19 epidemic. In the UK the Bank of England has bought a further £200 billion of gilts (in fact faster than Rishi is selling them) and provided the Chancellor with a £20 billion of 0% interest overdraft on the Ways & Means account. There is nothing magic about this. It simply reflects the fact that the state is the issuer and source of all our money and as such it is impossible for it to run out. There is no such thing as ‘taxpayers money' — any taxpayer creating their own money would be done for forgery!
Second, there would have been no ‘self-inflicted crisis from Indy' as the Lib Dem claims. All that would have happened is that Scotland would have followed SNP policy, which is to prepare to introduce our own currency as soon as possible after a vote for Indy and to then introduce that currency asap after Independence Day (Amendment D from SNP Conf 2019). The Scottish Pound would be entirely voluntary i.e. nobody would be forced to buy any so anyone could keep all their money in sterling (or anything else) if they so wished. However, if they wanted it then they would have to buy it with their existing sterling. That means that on Day 1 of its existence the Scottish pound (S£) would have 100% foreign reserves backing in the form of the sterling we used to but it. Compare with sterling which has 2% foreign reserves (the US$ 55 billion of net reserves of the UK government — strictly speaking the BoE has zero reserves as they belong to the Treasury and not the bank). As many folk would be canny and keep quite a lot of sterling while they saw what happened then there is a guaranteed future demand for the S£ since those folk will convert that gradually over the next year or two. Sterling would soon become a foreign currency in Scotland (probably after a few months) and then become subject to foreign exchange fees, etc. Plus its value would change and would no longer be one-to-one after the temporary peg ends.
Third, why is a S£ with 100% foreign reserves and a guaranteed market of buyers over the first couple of years going to fall against sterling? It won't! If anything it will go up.
Fourth, yes Scotland has ‘sophisticated financial infrastructure', but you do not really need that. A basic Central Bank needs about £15,000 of IT, a bank accounting software package, a connection to the inter-bank payment system, a couple of people to run it and a one room office. That is according to Prof Warren Mosler, a US economist and adviser to Greece and Italy about what to do if they got ejected from the Euro. All a Central Bank needs to do is to be able to debit and credit the bank accounts of the Treasury and the reserve accounts of the commercial banks. Everything else is bells and whistles. I would tend to say you should not put the current crop of commercial bankers and financiers in charge as they would just replicate the neo-liberal austerity type stuff they know and benefit from.
Fifth, ScotGov will and should run a deficit of up to 10% p.a. for the first few years of Indy. A state deficit is a good thing — it is the source of our money which is actually just IOUs from the state. It can do that for at least a decade before it reaches the average debt level of an EU member. This is also necessary in order to provide the additional S£ for all those folk that hung onto their sterling. Otherwise there will be shortage of S£ that will push it up in price in the FX market.
Sixth, the state controls the interest rate on its debt and not ‘the market'. That is because it can borrow directly (or indirectly via QE) from the central bank if it does not like a rate demanded by investors. The current QE has driven the rate to near zero whatever the investors might or might not want.
Seventh, Estonia, for example, became independent on 20th August 1991 and introduced the currency 9 months later. They had no warning the Soviet Union was about to collapse. Slovakia set up a currency in two months after the planned shared currency with Czechia collapsed almost immediately (which is what would happen to any plan to share sterling!). Timing is not a problem then.
Eighth, we do not need any share of rUK assets and therefore would not take any share of UK liabilities. The UK already declared that it wanted to be ‘the Continuing State' in International Law back in 2014. That is because if there was no continuing state then the seat on the UN Security Council would become vacant and go to somebody else. The Continuing State takes ALL the assets and ALL the liabilities EXCEPT what is located within the new states. Thus if it is in Scotland it is ours. The National Debt is really the National Savings and it belongs to rUK. For example £70 billion of the National Debt is the pound notes in circulation. Indy Scotland automatically gets +/- £40 billion of Foreign Reserves from the sale of the S£ (assuming folk only convert 40% of their sterling at the outset). We have no need of 8% of the UK reserves of $55 billion or a couple of rooms in an embassy. It is trivial by comparison. Also as soon as you start asking for assets you will get lumbered with the liabilities. No state that left the empire ever took a share of the UK debts (for the clever ones - that includes Ireland — the money it did pay the UK was down to a Liberal policy pre WWI which provided loans to Irish tenant farmers to buy out the landlord. The Free State government continued to collect the farmers' repayments and pay them to London until 1938 when the remaining debt was written off).
Ninth, issuing S£ but backing it with 100% sterling is not sterlingisation which is a misunderstanding in the Fact Check article. What the author is suggesting is having your own currency but pegging it to sterling. Sterlingisation is not having a currency at all and simply using sterling informally as we do now. That sort of sterlingisation (the Growth Commission plan) would be a disaster given Covid as practically everything the Lib Dem person says would be true. With sterlingisation ScotGov could not create its own funds, it can't control the interest rates, it would have to borrow sterling on the international market at whatever interest rate it could get, etc. Sterlingisation would be very bad! Our own Scottish currency but pegged to sterling is a lot better, but really that is because you should end that peg asap. It is not sensible to peg to sterling or indeed anything else.
We can now do the Currency / Economics of Indy talks again via zoom, so just email us at info@reservebank.scot, and find out more at www.reservebank.scot
All in Scotland now know what to do....
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Very interesting! Assuming that one motivation for another Scottish referendum is to allow Scotland to rejoin the EU, do you think that the EU would insist that independent Scotland adopt the euro?
Joining the euro is a condition of becoming an EU member now
But no timescale is imposed
In other words, the answer is a typical EU yes, but no
So you wouldn’t foresee any problems with reconciling the above with the somewhat stricter deficit rules of the eurozone? Scotland could in theory join the EU but delay adopting the euro until such time as it was ‘ready’?
Without doubt
Ask Sweden…
I really find it very difficult to see any credibility in the proposition that the EU, post Brexit (perhaps ‘no deal’), is going simultaneously to propose that Scotland will be welcome as a member, but it alone in the EU is commanded to fast-track into the Euro. It makes no sense at all, save only to Brexit Unionists, who have run out of arguments that the EU will never entertain Scottish entry to the EU (because, because, because…. they are Brexit Unionists), and are just insisting that they can continue to be silly.
Why wouldn’t the EU invite Scotland to join the EU post-Brexit? They owe Britain nothing. Why would that contradict the EU’s post Brexit best interests? 5m+ people from exiting Britain do not need to leave. It is the best solution for the EU that could be devised, unless you are a Brexit Unionist.
If they actually cared about the Union they would let Scotland join the EU, and arrange a Union fudge at least to try to keep Scotland in the Union (we have been doing some sort of fudge for 300 hundred years after all, one way or another); but Unionists do not know what they want, except controlling absolutely everything and having everything the way they like; however bad the consequences.
I overheard a conversation a few weeks ago about the documents provided (white paper was it?) regarding Scotland after independence.
One of the person’s involved in the discussion stated that decisions on running Scotland would be made by top level bankers and business people.
I found this a bit odd given the events of 2008 etc…
I am not sure how true it is though, could Dr Rideout shed any light on this?
Decisions on running Scotland should be made by us, via our elected representatives and keeping their feet to the fire once elected. Unfortunately the present administration seems rather susceptible to the corporate lobbyist and stuffing boards, etc with the ‘great and the good’. I do not know why and I am not sure how to stop that other than pressure from the people. Scotland is like any other small country (e.g. Ireland) where the ‘top’ folk tend to all know each other and is thus always susceptible to cronyism if not adequately kept in check.
I think it should always be considered foolish in the extreme to hand over the running of your economy and / or country to bankers and financiers. That is as true today as it was in the days of the Medici Bank in renaissance Italy.
One reason people will convert from sterling is that they need Scottish currency to pay their taxes. This better reveals the relationship between a currency and tax; tax is a guarnator of the currency.
There was never any question of rUK ever surrendering total control of the currency; and that meant they had to commit themselves irrevocably to keeping all the liabilities in 2014. The only alternative is to follow the implications of the 1707 Treaty (ie., reverse it) and declare that rUK was not a continuing state; at which point everything collapses forthwith; unthinkable.
For those who cannot understand why Governments are not like households; look at your household budget. Now try issuing your own currency, and taxing those whom you have managed to persuade to use it. This breakdowns very quickly, even as a thought experiment. Yes, it is as farcical as that. (The editors of tabloids should be invited to try the thought experiment – they can persuade themselves to believe almost anything – even Boris Johnson’s government)
Thanks John
There is the small matter of the Growth Commission’s 6 tests and the GC’s plan to reduce the deficit. Anyone who watches the SNP closely surely knows that there is no chance of their leadership launching a Scottish currency without the support of the Edinburgh financial sector and that is never going to happen.
If Covid had occured while indy Scotland was using Sterling it would have been an unprecedented disaster. The fantasy above sounds great but it bears little resemblance to the plans laid out by the SNP in the GC and supported by their conference. The time for discussing imagined utopias is long gone, the only version of Independence on the table is the one designed by RBS bungler Andrew Wilson.
It’s time the SNP listened
The growth commission was not supported by conference. As I was on the podium demolishing the 6 tests the majority of the audience were laughing. Exactly what I wanted. Amendment D consigned the 6 tests to the dustbin of history. It is just unfortunate that as yet the leadership refuse to accept that the other 119,900 members of the SNP over-ruled them.
What did amendment D say Tim?
SB, this goes to the heart of the internal silo mentality of the SNP. Dr Tim Rideout’s amendment to proposal to adopt the findings of the Growth Commission as official policy at the SNP Conference may have been carried, but those at the centre of power seem wedded to the orthodox neoliberal thinking of Andrew Wilson. This also suggests to me that nobody at the party’s centre understands MMT and the alternative methods and strategies it enables.
My fear is that Tim’s amendment will be quietly dumped in favour of GC orthodoxy (and cosying up to the Edinburgh financial sector), in which case the game’s a bogey. I’ve been in favour of Scottish Independence for 50 years, but I’d be very conflicted about voting for an “independence” that puts Scotland in a financial straitjacket. I agree wholeheartedly with Richard’s view that it’s time for the SNP to listen. Tim has mapped out the processes by which a Scottish Central Bank would be set up and run and the advantages its own currency would bring about (as did Robin MacAlpine in his book ‘How to Start a New Country’), so the SNP has no excuse for thinking that the Growth Commission’s proposals are the only show in town.
The new Common Weal work is also doing this…..
A question for Tim Rideout: I know you’re an SNP Member (which I’m not), so could you bring this blog item to the attention of the Scottish Cabinet Secretary for Finance, Kate Forbes. It would be interesting to see her views on the topics raised.
As a PS to my post, there’s a related article today (with a comment by Richard) on the Talking-up Scotland site at
https://talkingupscotlandtwo.com/2020/06/16/murdo-fraser-recommends-full-fiscal-dependency-because-thats-worked-well-in-the-past-three-centuries/
The article cites Estonia as an example of a small state reacting independently in response to the Covid impact on its economy. It is however part of the Eurozone and consequently has fewer options than a state with its own sovereign currency. However it is an example of a small nation with minimal resources reacting swiftly when the sudden Soviet collapse enabled it to become independent. It was left without a functioning democratic system, without a legal system, an economic system and without a currency of its own, yet it managed in a matter of months to set up a central bank and issue its own currency. A few years later, it opted to join the euro, which suited it at the time, as its strategy was to become embedded in the EU and Nato as a means of shielding it from Russian interference.
If Estonia could manage to establish the organs of state in a matter of months (starting from a base of zero), I can see no reason why Scotland, with its mature economy, legal system and legislature, couldn’t manage this in jig-time too.
Precisely…..
Well how you do that is an interesting question. First just a word of caution about Estonia – much to admire but also I was reading today they had the ideas of Milton Friedman as principal economic adviser. Not sure when he died so I don’t know if that was in person or ideas. Anyway, in my limited experience as soon as you become a minister or worse cabinet secretary then the civil service cut you off from all normal contact with the world. Emailing a minister is a total waste of time as you get the la la la reply from an official. I have established some contact worh Kate Forbes since we stayed with a relative in Skye when I did a currency talk there. Also she and my wife are passionate about gaelic, so I have managed to break through the mormal insulating wall.
I am not sure that pegging a currency is a good idea either. I do not wish to rehearse all the standard pros and cons; predicability versus vulnerability to speculative attacks and so on, but I would be interested in views. Randall Wray appears to believe a nonconvertible, floating exchange rate currency system ‘provides more policy space’; I think Warren Mosler prefers floating exchange rates (although I picked that up from the special case he illustrated of the student ‘buckaroo’, so …). I am really less clear about Stephanie Kelton? I know one problem here is the US orientation of MMT; and the dollar as a unique reserve currency makes this a special case.
I think it fair to say MMT always uses floating exchange rates, without exception. Stephanie Kelton does
Thank you Richard, much as I thought. Dr Rideout makes clear his rejection of a peg, but also refers to a “temporary peg”, so I am not entirely clear about the nature of the proposal. I assume the conventional MMT position would be to launch the new currency and allow it to float from the start?
In a word, yes
The SNP plan is to temporarily peg to sterling
I personally see little benefit in that
Tim sees some, I think, so long as it is very short and allows s£1 = £1 conversion for a while. I could concede that for a few weeks, I guess, with a pre-published time limit that could be cut short
I am not sure precisely what is the purpose of the peg. Dr Rideout explains the starting position; people will have sterling and will gradually switch as they wish and need S£. It seems to me the critical factor here for those with any reluctance is the need for S£ to pay taxes, regularly (direct and indirect). I would wish to see a fuller exposition of the reason for the peg (perhaps I missed it – I do not follow internal SNP politics with more than passing, abstract interest).
We do not need to look at Estonia to understand any of this. We did it three hundred years ago – with sterling. The old currency ‘pound Scots’ continued to be used long after the Union; indeed well into the mid century, the old currency was still being used to calculate prices in everyday personal or business transactions. These things are a great deal less dramatic than Unionists wish people to believe. They prefer lurid exaggeration to judgement or wisdom.
The plan in my talks sees the Changeover Weekend as the end of January 2024 and the end of the peg as the first Monday in March 2024, so five weeks. That should be enough time for folk to convert their sterling, so some right away, some folk hold back a bit and do so after a week or two, others as they realise it will cost them FX fees if they wait beyond the five weeks. Scots will likely still hold around £50 billion of sterling after that (about 50% of what we collectively have), so changing that will cost the usual 2% or so. Some will not be changed as e.g. a Shares ISA would stay sterling as the stock exchange is in London. Scottish Widows (and others) will likely keep their investments trusts in sterling since they are aimed at a market of which Scotland is only a small part. There will be new Trusts no doubt in the S£ in due course, and Michelle Thomson may get the planned Scottish Stock Exchange up and running. Scots who currently have UK gilts will probably want to sell those and buy ScotGov bonds instead to avoid the FX risk. That is one reason that ScotGov needs to sell bonds – if it does not then there is no safe haven for our pension schemes, etc. ScotGov could easily run a 10% deficit in the early years (due to costs of all the new ministries, etc), and might finance that 50% by selling bonds and 50% by running an overdraft at the Scottish Reserve Bank. Those new S£ are needed to allow for all the late exchanges to buy them with the sterling they have been holding back. Otherwise there would be a fairly catastrophic shortage of S£ in the FX market, which could send the price through the roof. That is not hard to see if you consider S£50 billion issued in initial 5 weeks. Another £50 billion of sterling we are all sitting on that we will bring in over the next 2-3 years – we can’t try to all buy the available S£50 billion with our collective £100 billion of sterling and expect the rate to stay at one to one. I have not looked for a while but sterling M3 was about £2 trillion and £100 billion is on the basis that 5% of sterling is in Scotland.
The purpose of the peg is purely to provide comfort to people (voters & businesses) who are currently on the fence but need to be persuaded that Independence is a safe option. A security blanket, if you will. Once Independence is established, the peg can be abolished fairly quickly.
Thank you Dr Rideout for that very full reply; it is appreciated. Most of it is descriptive, and invaluable on some of the detail, but I remain a little unclear about the fundamental purpose, the real and urgent need for the temporary peg.
Is it as Mr Cain suggest, a very short-term, ” security blanket, if you will”? Does the need to pay taxes in S£ not do the same job; along with the availability of S£ Government bonds as an inducement: carrot and stick. What is the point of a 4-5 week peg?
The Lib Dems……………………..what a formidable political farce they are.
I’m never quite sure of the relationship between the Faroes and Denmark but I think the former is an autonomous ‘region’ of Denmark and uses currency linked to the Danish Krone. With a population of c350000 people and although it’s government appears to have acted promptly, it incurred substantial costs in preventing the havoc of coronavirus that we have experienced in the UK. They have sold bonds to fund their costs, an idea that appeared to have passed by the Libdem ‘star’ by some distance. It’s clear that the current crises are blowing holes in all the arguments they have welded themselves to since the announcement of the date of the referendum all those years ago. I hope it’s time for all the ‘fiscal transfer’ nonsense to be put to bed so that we can get on with running our own affairs and economy. The incompetent Westminster led ‘4 Nation’ approach is, surely, the final nail in this dysfunctional union’s coffin?
The Faroes get testing right – a vet organised it using his lab….
I have not seen discussion of the cost
Basically they are a bit like Jersey and Guernsey – quasi independent
Sorry, link here https://local.fo/the-faroese-government-borrows-1-6-billion-dkk/
Quite a confusing article but I went to the Faroes National Bank and that was really useful…thank you
Hi, some interesting points but no mention of oil price and revenue collapse. Just because the boe is currently creating lots of money doesn’t mean it is a permanently viable option. The markets could decimate any unviable currency and economy like with equador, greece etc at any time. Then germany could step in with bail out money based on strict austerity measures as per greece, assuming in the eu/eurozone, maybe imf if not, as per labour government in 70’s! Then there could be riots etc! Barnett formula not mentioned either, scotland has higher spending per head than england under that, so not enough turkeys will ever vote for xmas on this 1 imo! Any chaos caused by too many idealist or left wing policies could adversely effect its close neighbours. Good luck if you leave the uk tho and hope the eu/germany treat you even better and not in their interests at all!!!
Respectfully, you do know that all money is now in effect endogenous i.e. bank-created, and all the BoE is doing is replacing money not being created by commercial banks at present
Your claim that is this left of centre is also absurd – no government can allow many many millions to be unemployed without support
You also make the absurd comparison with Greece – which did not have its own currency.
I am afraid there is no logic to your claim at all
Yes i was aware banks created money, apparently they create money on a keyboard when a mortgage is approved but it still goes on the balance sheet, so if they lend poorly you end up with a financial crisis as in 2008.
If central banks create too much money via q.e, inflation would likely increase eventually leading to higher rates and further recession, the markets could make that worse too.
The recent collapse in revenue and increase in government spending required large boe intervention but that can’t last, it is an emergency not a norm.
Sustainable economies dont run 10% deficits but i never said furlough etc is left wing, you said i did (besides ignoring other reasonable points).
Running a large deficit of 10% as you actually suggested is probably a left wing or unsustainable view however, greece was running about 7% when it cooked the books to join the euro, but the requirement in eu law is 3%, hence the cooking.
So you would maybe have to follow a similar path if you wanted to join the eu or eurozone and could end up in a similar state if that was your plan, not that they would repeat the mistake of allowing an overly indebted country into the eurozone.
However in letting poorer/indebted countries with weaker currencies join the euro, germany benefitted from the value of the euro being devalued (especially when compared to their very strong deutschmark), so their exports were roughly a third cheaper to usa/china etc and exports soared before bailing out greece and imposing austerity. Pen mightier than the sword!
How do you know you wouldn’t join the euro if you joined the eu?
How do you know you could join the eu running 10% deficits?
So many questions and unknowns!
There is no logic deliberately running a higher deficit than greece pre-austerity and bailout im afraid.
We have already made the point that comparison with Greece is meaningless
Why keep on about it?
And when there are 6 million people unemployed late this year what would you like?
That we run a deficit to keep them not working?
That we run a deficit to give them work?
Or that they starve?
Please tell?
Ecuador (along with Panama and Zimbabwe) uses the US dollar and gave up its own currency in 2000. Markets do not ‘decimate’ currencies without a good reason – usually attempting to peg at an unrealistic level or running up borrowing in foreign currencies. First Rule of the currency issuer – All taxes and official payments must be in the currency of the state only. Second Rule – never borrow in any currency other than your own.
Precisely
Sorry meant venezuela not equador where inflation is in thousands %.
Greece was bailed out by ecb and imf and had austerity imposed to sure up the markets confidence in euro
Venezuela also uses the dollar extensively
The comparison with the UK is meaningless
“The markets could decimate any unviable currency and economy like with equador, greece etc at any time. Then germany could step in with bail out money based on strict austerity measures as per greece”
You really need to explain the Greek “unviable currency”: the Euro? As Richard pointed out. Then you can explain the nature of the German ‘bail-out’; not least to the Greeks. The independent media news outlet Euractive reported in June 2018, that Germany had benefitted by €2.9bn between 2010-2017 from the Greek crisis, an interesting way of ‘bailing-out’; this information was taken from an official Ministry of Finance response to a question in the Bundestag. The German Green Party spokesman Sven-Christian Kindler described the German real response to the Greek crisis as ‘Kaputtparkurs’ (destructive austerity)*.
* Kaputtsparkurs: surely the perfect new name for the Conservative Party in Britain.
Great term
Sven Giegold uses it too, an old friend
Sorry meant venezuela not equador where inflation is in thousands %.
Greece was bailed out by ecb and imf and had austerity imposed to sure up markets confidence in euro
See comment already provided
So here is the formula: Euro + Kaputtsparkurs = bring your own currency.
Simple.
Sterling + Kaputtparkurs = bring your own currency.
Do you have the hang of it now?
I think this is an excellent analysis of the way forward for currency.
Yes, I’m worried that the banker/lobbyist faction in the SNP have not jettisoned the GC. But there is a bigger worry, frequently posted in The National comments to articles and on other blogs and among some of the cogniscenti, (or is it just malicious gossip?), and that is that the SNP have no intention of holding another referendum soon and that the leadership also has no intention of pursuing independence.
Anyone, who has more knowledge, care to comment?
Thanks for this post, the explanations and the links at the end. As a recent convert trying to get head round MMT theory, this has been a big help in understanding with increasing confidence in expressing opinions.
After attending the Common Weal zoom presentation and posting on Facebook you get the usual derisory comments eg “where would the money have come from, eh?”, “who would have paid for the crisis we’re in?”, etc, etc. Although able to counter to an extent, it’s good to have a more in-depth understanding which is growing.
Also, watched the presentations by Bill Mitchell and Warren Mosler on the Reserve Bank website, now know a bit more about the background and history of those who formulated it, and these again were highly informative. Although a supporter of Scottish Independence and left-leaning, it was enlightening to hear Bill Mitchell comment that MMT is ‘agnostic’ giving the opportunity to turn the tables on the attitude of some detractors.
It’s good to have found a home and support for a lot of thoughts and ‘feelings’ that buzzed around and only wish had discovered it earlier and when a lot younger.
Never too late!
Given that Scotland now has control of income tax beyond the first 10%, would it be possible for it to introduce a S£, requiring that that part of income tax be paid in S£ ?
The next question is whether the UK government has the power to veto this, and whether, if so, it would be in its interests to do this?
No
It has no authority to run a central bank
Sticking with a common currency then, are there any examples of countries where the central bank is decentralized? Could there be a federal setup for the UK in which each of the four partners had some central banking powers, e.g. to do its own quantitative easing, within some defined framework?
A central bank can’t be decentralised
It’s in the name
A central bank is a monopoly, by defintion